Jack Layton wants more affordable housing - Ottawa is the reason we don't have affordable housing

Good old Jack, always looking out for the little guys... ya, right

http://thechronicleherald.ca/Metro/1154973.html

Let's take a look at why houses have become less afordable.


The price of a house in Canada has about doubled in the last 10 years. Have Canadians decided in the past 10 years that housing is now more important than ever before and therefore are willing to pay twice the price? Or have incomes doubled in the past 10 years? Or maybe the prices of other goods such as gasoline, food, cars gone down so significantly that Canadians can now spend more on housing?

Technology has greatly improved the process for building houses, and ceteris paribus, this should have caused prices to go down. But there are other factors at play, and they have had a much greater affect on housing than technology. And all of them involve goverment. The biggest one is the increase in demand. There are basically 3 reasons for this increase in demand.

1)The Canadian Mortgage and Housing Corporation is creating a HUGE subprime market in Canada. The cap for this CMHC has been raised to $600 billion. That's about 20,000for each man, woman and child in this country. Who uses the CMHC? Borrowers who are not the banks' prime borrowers (ie. Subprime). They put on average 5% down, and have an amortization rate of 35 years. This is fine as long as prices keep raising, debt remains cheap, and the economy keeps sputtering along. But we all saw what happened when prices stop raising south of the border. A side benefit of this rediculous policy is that rent prices have jumped because housing prices have jumped.

2) The Bank of Canada - There is no reason that interest rates in Canada should be as low as they are now. We have gone though recessions before, and never have interest rates gone this low before. Let's ask the question, if the Bank of Canada wasn't price fixing, what rate would interest rates be at? Would they be at below 1%? Of course not. Moody's AAA bonds are at about 5.5. When you have a fixed interest rate so much lower than what a natural rate would be given the risk in the economy, we have massive malinvestment, and that is what we are seeing in the housing market.

3) Increased Population Denisty. For whatever reason, the Government has decided that our major cities need a continuous massive influx of peope ever year. In fact, I've been told that if you want to move to Canada, and you don't put a major city as your desitation, you will likely be rejected. This policy is beyond my comprehension. If cities like Toronto had the same population as it had 20 years ago, land prices could never be what they are today. Even the MSM admits this.
http://www.thestar.com/article/696854

So there you have it, the three major reasons that housing is unaffordable are fixed interest rates, the CMHC, and Goverment policy. Of course, even if house prices were at the level they were 10 years ago, you'd still have socialists like Mr. Layton saying that prices are too high. This is all politics. If he really wanted more affordable housing, he would be encoruaging people NOT to move to big cities, would be cutting taxes to make prices more affordable, and eliminate enties like CMHC that create artifically high prices, and allow the market to set interest rates so that they don't go up and down like a roller-coaster.

The fact is that he doesn't know how to bring about affordable housing, and if he does, he simply won't. It's much better to make demands and ask for more money because it looks good on TV.

You want affordable housing? Just wait a few more years and let this goverment-created bubble pop.

The Canadian Housing Market

In an Econometrics course I took in grad school, I had a professor tell us that the stock market crash in 1929 was not the result of an asset bubble, because, if you had certain expectations of returns and interest rates, then the market was actually within reason. I was flabbergasted, if the stock market was not in a bubble, then is a bubble even possible?

Well, if you read the mainstream media about the Canadian housing market, you will come to the same conclusion, there is no asset bubble. If you assume that interest rates will stay at near zero, and that housing prices will still provide a decent return, then prices are within reason.

Let's see an example. If the average family who buys a house in Canada has combined income of 100K, and they can afford to put 2100 to a mortgage, and given that the average down-payment is now 5%, interest rates are 2.5%, amortization rate is 35 years, then this couple can afford about a 600k house.

Of course, this is assuming that 2.5% is sustainable, which it isn't. If this increases to a more reasonable 5.5%, then this couple can only afford a 400K house. And if interest rates increase to 8%, they can only afford 300,000.

I'm often surprised how few people understand this simple math, how many people tell me that this is a great time to buy. I would argue that this is the worst time to buy, and not only because interest rates will go up. Although the monthly payments are the same in both situations, one had a principle of 600K and one has one at 300K. Beside the lower property taxes, you are much more likely to pay off 300K within a reasonable time than you are 600K.

And of course, real Canadian incomes are not going up, nor will they, for reasons we will cover later. So the amount a family can put towards a monthly payment will not increase. SO they only variables that matter are the interest rate, and the amortization rate. And an amortization rate of 35 means that many families will approach retirement before they will pay off their house, so I don't see this going up, and will likely go down when interest rates go up.


We'll go over the causes of this crazy housing market later on, but for now, I hope you can agree with me that this is not a good time to buy, in fact, it may be the worst time. Think about this math the next time you read about line-ups at Condo openings, or with multiple bidders driving prices up 50%. Why were there no line-ups 10 years ago when prices were half of what they are now?